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StockTalk
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TMF Interview With General Instrument Corp.
CFO Eric Pillmore
July 27, 1999
With Brian Graney (TMF Panic)
Based in Horsham, Pennsylvania, General Instrument Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GIC)") else Response.Write("(NYSE: GIC)") end if %> is a supplier of broadband cable and satellite TV telecommunications systems. The company makes analog and interactive digital set-top boxes, two-way cable modems, and end-to-end broadband transmission systems. We talked with General Instrument CFO Eric Pillmore about the company's recent financial performance, its business advantages, and its vision for the broadband-connected world of tomorrow.
TMF: Your second quarter results came out last week. What were the one or two items from those results that really stood out most in your mind?
Pillmore: I think the thing that was most impressive was our continued orders growth, particularly in the digital and transmission segments of our business. The book to bill continued at a rate above 1.1. Our sales and orders both [stood out]. Sales grew at about 23% year-over-year, orders grew about 15% year-over-year. And that excludes the loss of our PRIMESTAR business, which was obviously a significant business in the prior year but went away in 1999 as a result of the transfer of that business to DirecTV. So, I guess the growth rate that we saw in orders was most encouraging, and that was really driven by digital and transmission.
TMF: What are some of the elements that as CFO you are concentrating on from a financial performance standpoint? What areas do you think GI really needs to improve upon?
Pillmore: We really have three areas of focus from a financial perspective: sales growth, operating margin improvement, and cash generation.
From an operating margin perspective, our operating margins have improved from right around 8% in the first quarter in 1998 up to 12.6% in the quarter that we just closed, so about a 5 to 6 [percentage] point improvement over that timeframe. That's really driven by continued healthy contribution margin across all our products, including those products that are new technologies that we've introduced. Our ability to introduce new products at very close to company average margin rates has been a big plus for our business, particularly given the rapid change in technology.
The other thing has been the ability to leverage our base cost over a higher growth sales platform, particularly in the general administrative expense area. Our general administrative expenses, or SG&A, has gone from about 10% of sales to down below 8% in the quarter we just closed, and that's obviously had an impact on our operating margins.
And the last is cash generation. This quarter [was] our fifth quarter in a row where we generated over $100 million of cash from operations. We've eliminated the significant debt this company once had, and we finished the quarter with about $365 million in cash. Over the last five or six quarters, we repurchased over $300 million worth of stock, and that repurchase obviously has been netted against the net cash that we have on our books.
So, we have a very healthy balance sheet today with that $365 million in cash. We also have an asset investment in Broadcom <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BRCM)") else Response.Write("(Nasdaq: BRCM)") end if %>, which at this point is valued at over $500 million. That is not showing up on our books but, in the year 2000, can be monetized, and that'll yield some additional cash for our business as well.
TMF: Are you going to use some of the cash you're generating to get into new businesses or new product areas down the road?
Pillmore: We've got a couple of options. We can continue to repurchase shares in the marketplace at opportune times. In addition to that, we're going to look at areas where we can expand the portfolio as you suggest, particularly in the IP [Internet protocol] telephony area as well as in the transmission networks area. We'll be looking for opportunities to be able to expand the enterprise.
TMF: What is it about your business that you think really sets you apart from your competitors, especially Scientific-Atlanta <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SFA)") else Response.Write("(NYSE: SFA)") end if %> in the set-top box market?
Pillmore: We were really first to market with a two-way interactive digital platform that we've been installing and servicing for customers since the fourth quarter of '96, [so] we have a significant lead relative to the competition. We've shipped over 700 head-end systems today and over four million [set-top box] units. The combination of those gives us a very strong position in the marketplace, which yields somewhere in the 80% to 90% market share position. And that is probably the most significant advantage we have.
The response from customers has been very good. The kind of returns our customers are generating on our equipment and on our systems has been very positive to date, and that continues to yield additional growth and sales.
TMF: What do you think is the most misunderstood aspect to your business or of the broadband-over-cable area in general?
Pillmore: In our business itself, that's a good question. We work pretty hard at communicating clearly our markets, the growth opportunities, our financial position and results, and the strategy that we have to capture that growth. I don't know if there's anything really at the moment that is not well understood, principally because we've worked at communicating those aspects of our game plan pretty widely with investors.
TMF: One thing I'd like to understand more is what makes equipment providers such as yourself more attractive as a long-term investment than services providers, such as Excite @Home <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATHM)") else Response.Write("(Nasdaq: ATHM)") end if %>, or even the cable companies themselves providing the broadband.
Pillmore: I think for a company like ours, the number one [thing] is the installed base that we have not only in North America, but globally. We have over 40 million set-tops installed in the international arena, the analog technology. The strength of that installed base, the market share and the reputation that we have with our customer base, and the fact that there are investors out there today like Bill Gates, Paul Allen, and many others investing hundreds of millions of dollars and leveraging the technology that we provide I think puts us in a very good position as a[n] equipment provider. There's obviously opportunities for us and others to grow into the services area, but I think the position we have for investors, the position that we have in the equipment space, is very, very attractive.
TMF: You mentioned Bill Gates. How is Microsoft's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> set-top box operating system agreement with AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> earlier this summer going to affect your set-top box business, if at all?
Pillmore: We offer at the moment four major operating systems on our platform, one of which is the Microsoft Windows platform. We also offer a Sony <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SNE)") else Response.Write("(NYSE: SNE)") end if %> system, the Sun Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SUNW)") else Response.Write("(Nasdaq: SUNW)") end if %> Java system, and an Oracle <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %> operating system. And basically it's up to our customers to select the operating system they want. In the case that you mentioned, AT&T has selected the Microsoft Windows operating system for the time being for most of their systems that are out there. We're working actively with Microsoft and integrating that platform into our set-tops.
TMF: One of your newest products in the set-top box market will allow users to watch TV, send e-mail, and even make a telephone call all at the same time.
Pillmore: Correct.
TMF: In a few years, what will differentiate a home PC from a set-top box-enabled TV? Is there really going to be a day when home PCs just become a thing of the past?
Pillmore: No, I think just because of the wiring configuration complexities in the home, there will continue to be a demand from consumers for the PC. I think, though, you're going to see that the applications and the functionality of both the television ultimately and the PC [will be] very much alike.
I don't think we're at the point in the next two to three years where people are going to be comfortable, particularly on the heavier applications that we're used to doing on a PC, doing those on the television and vice versa. I don't think people wanting to enjoy what is entertainment today on a wide-screen television [are] going to be happy and comfortable doing that on a PC. But that's not to say that there won't be three tuners built into a PC and similarly into a set-top like the technology that we're developing.
TMF: Finally, could you maybe project a little bit about what you think the business is going to look like in five years, if you can look down the road that far?
Pillmore: Your guess is as good as mine. I think what you're going to see is the expansion of the home networking architecture that a number of folks are beginning to work on. What we see is our platform being the center of that home network. That's the exciting part of the vision we see for the technology that we have [and there will be] all kinds of applications in the home that kind of spring off of our platform.
TMF: It certainly does sound exciting. I really appreciate your taking the time talking to us today.
Pillmore: OK, Brian.
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